Did you know that companies like Tesla or Uber wouldn’t be in the position they are today if it weren’t for the backing of corporate venture capital firms? Today, entrepreneurs create millions of startups every year. However, only 10% survive beyond the first year. Lack of sufficient cash flow is the main reason for it. Starting a tech startup requires a brilliant idea, a team of talented people, and huge capital. Corporate VC can be a light of hope for these tech startups today.
Why Look For Corporate Venture Capital?
In tech startups, you will have to wait a long time to see some profit. Therefore, relying on bank loans for capital can have disastrous consequences. You will have to repay the bank even if your company doesn’t earn any revenue. Also, collateral is a fundamental requirement of a bank loan, which the tech startup won’t be able to provide.
Corporate VC can be a better startup funding choice. Unlike the traditional venture capital (VC) firms that get money from other investors, the corporate VC firms provide money from their own balance sheet. In exchange for a share of equity, you will get the necessary capital to start and grow your tech business.
Along with capital, the corporate venture capital will give you strategic advice, networking opportunities, and mentorship. The startup can also leverage the corporation’s customer base and sales channels to expand the business rapidly. Daimler invested $50 million on Tesla and helped them secure regulatory approvals, shared their automotive expertise, and provided access to supply change. Google Venture invested $258 million in Uber and gave access to the Google Maps API, which helped to enhance user experience.
Over the past decade, a growing number of large corporations have invested in tech startups. The corporate VC firms consider it a strategic investment that will give them early access to technological innovation, an opportunity to explore new markets, and diversify their portfolios.
Types Of Corporate VC Investments
Corporate VC comes in various forms according to objectives and the means of investment. There is the driving investment that supports the company’s core business by developing innovative technologies to help the corporation expand. For example, an automotive company is investing in developing a driverless car. Emerging investment supports emerging companies that want to explore things beyond their main operations. Enabling investments improves a corporation’s internal operations to improve efficiency and lower costs. For example, a corporation using AI for error detection. In financial investment, the corporation gives money to get a return.
Investment Criteria For Corporate VC
Not any startup can be eligible for startup funding. One of the most important criteria for applying for this type of funding is having strategic alignment with the corporate venture capital firm. If the startup’s tech solution alights with the corporation’s technology needs and business strategy, then a strategic investment will take place. The startup should be able to enter the market early and attract customers so that it can have a competitive edge. They must demonstrate having a very experienced and talented team working to help achieve goals. Most corporate VCs expect at least 20% Internal Rate of Return (IRR) over a 5 to 7-year period. This requires quick execution of business plans. So, there must be a strong implementable business plan to get these funds.
The corporation that will provide corporate venture capital will conduct due diligence to analyze the company’s market position, financials, and growth potential before deciding on a strategic investment. They will look for startups providing unique tech solutions that have strong market demand. Unlike the traditional VCs, the corporate VCs only seek to attain positions of 10-30% as they are not interested in controlling the business, but to build a relationship and creating value.
How To Approach a Corporate VC Firm
You must prepare a strong value proposition mentioning the unique benefits of the solution you are offering. Your proposition should set you apart from the competitors. Form a strong team to show that you have all the right talents to establish the business. The people in your boardroom should bring in innovative ideas and help the company move through the complex corporate world. If you can show that you have several influential connections, then the investor will feel more confident in investing in your startup.
Remember that corporations providing startup funding look for companies with scalability potential. So, you must showcase your ability to grow and change according to market dynamics. You must demonstrate regulatory compliance so that the startup doesn’t face any challenge later on. Always negotiate a favorable deal with the startup funding corporation. Firms that want to offer corporate VC to tech startups are currently focusing on solutions related to artificial intelligence, cloud, cybersecurity, and sustainable technology. Therefore, if you are providing solutions in these sectors, then you have a high probability of securing a startup fund.
The most amazing thing about corporate venture capital firms is that their goal for investment will be aligned with your business goals. They won’t invest just to make money, but to achieve something bigger, like being the first one to adopt a new technology or hold a strong market position.
Corporate venture capital investment provides the tech startups with market validation and credibility right away. When people notice that an industry-leading corporation is backing an emerging company, your tech startup will instantly become visible in the market.
If you partner with a corporate venture capital firm, then despite the benefits, you will face some challenges too. Corporate VCs invest in startups that align with their business objectives. If the startups’ vision changes, then it may result in conflict. Also, the firm may include clauses in the contract that may restrict the tech startup from partnering with a competitor or entering a particular market. The decision-making process of the large corporation is also slow and bureaucratic. But startups today want flexibility and fast decision-making, which may lead to a clash of opinions.
Conclusion
You will need to plan carefully before approaching a corporate VC firm. Once you make good use of the startup fund that you receive, the challenges you face will become invisible. By partnering with these firms, you can drive your business forward and start generating revenue.
